Fiat takes majority control of Chrysler

Italian automaker to pay $500 million for U.S. Treasury stake

Luca Ciferri

Fiat will pay $500 million for the U.S. government's 6 percent stake in Chrysler Group. With the move, Fiat boosts its Chrysler stake to a controlling 52 percent from 46 percent.

TURIN, Italy -- Fiat S.p.A. will pay $500 million for the U.S. government's 6 percent stake in Chrysler Group. With the move, Fiat boosts its Chrysler stake to a controlling 52 percent from 46 percent.

Fiat-Chrysler CEO Sergio Marchionne said the agreement marked the complete exit of the United States Treasury as a Chrysler Group shareholder.

The proceeds of the deal also include the sale of the U.S. government's call option on a United Auto Workers healthcare trust fund, the Treasury said.

The Treasury's announcement of the deal late Thursday came on the eve of President Barack Obama's scheduled visit today to a Chrysler plant in Toledo, Ohio, where he is expected to tout the success of the auto bailout that saved American jobs and historic auto nameplates like Chrysler.

The Obama administration invested $12.5 billion in Chrysler under the Troubled Asset Relief Program in 2009 as part of an auto industry bailout that eventually brought both Chrysler and General Motors Corp. through bankruptcy court.

'Improbable turnaround'

After the transaction with Fiat, the Treasury will have received some $11.2 billion back in principal repayments, interest and canceled commitments from Chrysler. The "Treasury is unlikely to fully recover the difference of $1.3 billion," it said in a statement. Treasury Secretary Timothy Geithner said the administration bailout had enabled automakers to mount "one of the most improbable turnarounds in recent history" that is now creating jobs as domestic automakers gain market share.

Fiat agreed to pay the Treasury $500 million for its 98,461 shares of Chrysler. The Treasury also had an option to buy shares held by the UAW retiree trust and Fiat agreed to buy that for $75 million -- with the Treasury to get $60 million and the government of Canada $15 million.

Since the 2007-2009 financial crisis ended, the Treasury has been making every effort to sell off interests it acquired in industry as part of the rescue effort during those troubled years.

Before Thursday's announcement, Fiat held a 46 percent interest in Chrysler. That will rise to 52 percent when the transaction is completed and thus give the Italian automaker majority control, which was one of Marchionne's overarching goals for 2011.

Fiat has made swift work toward that goal in the past six months after meeting certain performance targets and repaying its $7.6 billion in loans owed to the United States and Canada last week.

Chrysler filed for bankruptcy protection in 2009 after the credit crunch and recession pummeled auto sales. June 10 will mark the two-year anniversary of Chrysler's emergence from bankruptcy under the management of Fiat.

Target of 6.6M sales

As the two companies deepen their financial ties, they are also drawing closer together operationally. Earlier this year, Marchionne left open the possibility of a full merger of the two companies with a single headquarters.

Marchionne's revival strategy for both automakers hinges on boosting combined sales to 6.6 million vehicles by 2014, an ambitious goal considering that Fiat and Chrysler together sold just over 3.6 million vehicles globally last year.

An initial public offering for Chrysler is also losing appeal, as Marchionne said this week the timing and possibility of an IPO would depend on the level of interest of the healthcare trust affiliated with the UAW.

"I don't think there's a 100 percent guarantee of the fact that there is an IPO," Marchionne said this week at an event in Windsor, Ontario, just across the border from Detroit. But he added an IPO would be the "easiest way" to create value.

Max Warburton, senior analyst at Bernstein Research in London, said: "The previous assumption was that Chrysler would make an IPO, but this now looks unlikely and a full takeover by Fiat Auto seems more probable."

He noted that Fiat is moving far faster and more decisively than expected to increase its interest in Chrysler. The part of the deal for Fiat to take over the U.S. government's rights to buy UAW shares means Fiat "is effectively in a position to buy the whole company," Warburton said.

Fuel efficiency

Fiat is expected to receive another 5 percent stake in Chrysler by year-end when it homologates a new Dodge model capable of 40mpg on the highway, boosting its stake to 57 percent.

Launching this fuel-efficient model is the third performance target imposed on Fiat by the U.S. Treasury.

The first was to build a fuel-efficient engine in the U.S. This was reached in January when production of the Fiat 1.4-liter MultiAir engine began in the Dundee plant, Michigan. The second target was to export from North America $1.5 billion of Chrysler vehicles and open up Fiat's dealer network in Europe and Latin America to Chrysler products. This target was reached in April.

Every performance target was worth a 5 percent further stake of Chrysler on top of the 20 percent the Italian automaker received in June 2009 when the new Chrysler Group was created after bankruptcy of the old Chrysler.

The United Auto Workers' Voluntary Employee Beneficiary Association (VEBA) holds 41.5 percent of Chrysler and the Canadian government the remaining 1.5 percent.